Question

The consumption function of an economy is given as C= 40 + 0.8 calculate the total increase in income and consumption if investment expenditure increased by 500 crores

Answer 1

Answer:

Multiplier(k) => Change in income / change ininvestment = 1/ (1- MPC)

=> change in income/ 500 = 1/0.2

=> change in income/ 500 = 5

=> change in income = 5 * 500 = 2500 crores.

Increase in income = MPC (^Y)

= 0.8 * 2500 = 2,000 crores.

Answer 2

C= ć + b(y)
C = 40+0.8Y
Mpc = 0.8
I = 500
Change in income=?
Change in in consumption =?

K= 1 / 1-Mpc
1/1-0.8. = 1/0.2= 5

K= change in income/ change in investment
5 = change in income / 500
2500=change in income

Mpc=change in consumption/change in
income
0.8= change in consumption/2500
Change in consumption = 2000